Under a compromise agreement made last year, tax rates will return to Clinton-era levels and government spending will be slashed in automatic cuts, unless Congress and the White House can agree on a plan to shrink the federal deficit.

Leaders from both parties seemed pleased after initial negotiations on Friday.

"We have the cornerstones of being able to work something out," said Democratic Senate Majority Leader Harry Reid of Nevada.

"This is not something we're going to wait until the last day of December to get done. We have a plan. We're going to move forward on it," he said.

Republican Speaker of the House John Boehner seemed upbeat, smiling after exiting the meeting. ""To show our seriousness, we've put revenue on the table, as long as it's accompanied by significant spending cuts," Boehner said. "It's going to be incumbent on my colleagues to show the American people we're serious."

The main point of contention is taxes. Obama has insisted that any deal with the Republicans must include a tax hike for Americans making over $250,000 a year. Obama's plan would raise their rates by about 3 percent, but leave rates for people making less than that threshold where they are.

"That means all Americans - including the wealthiest Americans - get a tax cut. And 98% of Americans, and 97% of all small-business owners, won't see their income taxes go up a single dime," he said. "Let's get it done soon - so we can give families and businesses some good news going into the holiday season."

Republicans, however, want to avoid raising taxes, or at least the appearance of raising taxes. But their refusal to raise taxes on wealthier Americans may mean taxes go up for everyone, and many Republicans are beginning to question whether that outcome is worth the fight.

So far the Republicans, led by Boehner, have offered increases in revenue from sources other than tax hikes, like a reforming of the tax code and limiting deductions.

But after a resounding victory in last week's election, Obama and the Democrats are emboldened. After meeting with labor leaders and progressive groups this week, Obama said he would refuse deep cuts in social programs like Medicare and Social Security favored by the Republicans.